Govt moves to redraft direct tax laws to modernize income tax

The government has appointed Akhilesh Ranjan of CBDT as head a task force that will advise the centre on drafting a new direct law that suits India’s economic requirements

The new direct tax law is expected to make taxation more progressive, wherein the tax burden will be higher on those with better payment capacity.

New Delhi: The Narendra Modi government will take a fresh look at modernizing the Income Tax Act, 1961, after an earlier effort by a six-member task force got derailed. The union government on Monday appointed Akhilesh Ranjan, member (legislation), Central Board of Direct Taxes (CBDT), as the new convener to head the task force, which will advise the government on drafting a new direct tax law that suits India’s economic requirements. The report has to be submitted by 28 February.

The report will be an important document for the Modi government to showcase before 2019 Lok Sabha elections, articulating the tax policy direction it would pursue if the National Democratic Alliance (NDA) returns to power.

Other members of the task force, which had earlier missed the 22 August deadline, will remain the same.

The Modi government has so far attempted to phase out corporate tax concessions, reduce corporate tax rates for small businesses to 25% and give relief to small income earners by lowering tax rates. The government also plugged some of the massively abused loopholes in the bilateral tax treaties with Mauritius to prevent tax-evaded money coming back into the country in the form of foreign direct investment.

The new direct tax law is expected to make taxation more progressive, wherein the tax burden will be higher on those with better payment capacity. This approach was evident in the government’s choice of tax rates when it reformed indirect taxation by ushering in the goods and services tax (GST). Luxury items are subject to the highest rate of 28%-plus cess and mass use items are either exempted or are kept in the 5% GST slab, although a four-slab system risked making GST more complex.

The task force is, however, unlikely to propose the difficult-to-implement inheritance tax. “Although it may be easier to say that one should tax the rich more, implementing an inheritance tax is complex. It can only lead to high-income earners getting resettled elsewhere,” said a tax official, requesting anonymity.

“There are many areas where the government could simplify or bring changes to direct taxation. But it is to be seen if that could be achieved by amending the existing law, or by bringing in a new legislation,” said Amit Maheshwari, partner at Ashok Maheshwary and Associates Llp, a chartered accountancy.

Another government official, also requesting anonymity, said that even after the task force gives its report, it may take time before those recommendations are deliberated upon and changes are proposed. “Direct tax law is a complex one. Naturally, it will take time if we were to introduce a new legislation.”